Two More Victories for the Fiduciary Rule - But Will They Be Hollow Ones?

Following in the footsteps of a District of Columbia district court judge, a second judge in Kansas refused to issue an injunction barring enforcement of parts of the Department of Labor's fiduciary rule. The Kansas judge, in another well-reasoned decision, found that the United States Department of Labor did not violate the Administrative Procedure Act when it issued the rule, and that plaintiffs were not likely to prevail in their challenges to the rule as it applied to fixed index annuities. Just a few days ago, the D.C. appeals court upheld the D.C. district court decision and refused to enjoin enforcement of the rule pending a decision on appeal. This is another sign that the plaintiffs are not likely to prevail on the merits at the end of that litigation.

More Decisions to Come.

Although a pattern seems to be emerging, consistent with typical judicial deference to overturn an agency's interpretation of a statute, there are other cases challenging the fiduciary rule pending in Texas and Minnesota. Courts in the Fifth Circuit sometimes march to a different drummer, though, and that has in the past been the source of some unanticipated decisions, including the recent decision overturning the new overtime rules.

Appeals will undoubtedly follow, regardless of how the remaining courts come out, and we are not likely to have all of these resolved by the April, 2017 general implementation date for the rule.

What Will the Trump Administration Do?

However, the big question here is whether any decisions upholding the fiduciary rule will be nullified by actions of the new Trump administration. No one knows yet, for as far as we know, Mr. Trump himself has not directly expressed any views on the rule one way or the other. He and his advisers may be opponents of complex regulations, but as they are finding out in trying to plan for repeal of the Affordable Care Act, undoing things is not always easy. The President-elect did not identify as a strong supporter of Wall Street during his campaign, so I think it is too soon to conclude with any certainty that the fiduciary rule is dead. Delaying or revising it are also possibilities.

What to Do Now.

What should those affected by the rule be doing? My colleagues have been speaking and writing about this issue, and their consensus seems to be that it is likely that some form of the fiduciary rule, perhaps with a delayed effective date, may remain in place. For example, this was SEI's comment on releasing a recent advisor survey:

"We believe advisors need to continue to prepare for the DOL rule despite current speculation that it will not come to fruition because of the incoming administration," said Wayne Withrow, Executive Vice President of SEI and Head of the SEI Advisor Network. "These survey results demonstrate that the rule is impacting advisors' considerations in several aspects of their business when looking at 2017, which is one reason we are seeing advisors re-evaluate their infrastructure, increase attention to client-facing activities and focus on the outsourcing of non-client facing activities."

The only safe advice we can give clients at the moment is to go ahead with their compliance efforts. Many large players on the field, like Merrill Lynch and Morgan Stanley, have already determined how they plan to comply and are taking steps to implement those changes.

Can You Put the Genie Back in the Bottle?

As I have previously written, regardless of the fiduciary rule's fate, the genie is already out of the bottle. The mainstream press has focused attention on the current situation that permits non-fiduciaries to give conflicted advice. The wave of class action litigation against plan fiduciaries challenging plan fees and investments continues unabated. Department of Labor audits will continue. It will be hard for plan sponsors and in-house fiduciaries to justify relying on advice from advisers who are not fiduciaries, regardless of whether the law is changed. And it will not be so easy for entities that have already announced that they will take on a fiduciary role to backtrack and revert to non-fiduciary status. The landscape has already changed.